Czech National Bank maintains monetary easing pace in May

At its 2 May meeting, the Board of the Czech National Bank (CNB) cut the two-week repo rate to 5.25% from 5.75%, following a similar 50 basis point cut at its previous two meetings in March and February. In addition, the CNB reduced both the Lombard rate and the discount rate by 50 basis points to 6.25% and 4.25%, respectively. All seven board members voted to reduce rates by 50 basis points.

Inflation has returned to the Central Bank’s 2.0% target in recent months, providing the leeway for the Bank to continue loosening its stance. The rate cuts likely also aimed to boost still-subdued economic activity. The reason not to opt for ever larger rate cuts was due to upside inflation risks, including the possibility of a slower decline in inflation expectations and potential disruptions in tradable good prices due to currency fluctuations.

Looking ahead, the Bank said that it “confirms its determination to continue its tight monetary policy in order to stabilize inflation near the 2% target in the long term”. It also reiterated that monetary easing may be halted at any point should inflation, particularly its core component, fail to align with the forecast. Our panelists expect the CNB to cut rates further by year-end due to under-control price pressures.

Commenting on the outlook, analysts at EIU stated: “Although a rebound in consumption demand and economic activity will elevate inflation in mid-2024 to mid-2025, it will probably remain within the CNB's target range (2% ±1 percentage point). As a result, we expect the CNB to continue with its monetary easing schedule at a moderate pace, by 50 to 75 basis points each quarter until mid-2025, when the policy rate will stabilise at about 3%. The CNB will cut interest rates to the neutral level much sooner than central banks in neighbouring countries.”

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